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Cornerstone Exercise 17.4 (Algorithmic) Sell at Split-Off or Process Further Decision, Alternatives, Relevant Costs Betram Chemicals...

Cornerstone Exercise 17.4 (Algorithmic)
Sell at Split-Off or Process Further Decision, Alternatives, Relevant Costs

Betram Chemicals Company processes a number of chemical compounds used in producing industrial cleaning products. One compound is decomposed into two chemicals: anderine and dofinol. The cost of processing one batch of compound is $73,500, and the result is 5,600 gallons of anderine and 8,200 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $12.00 per gallon and the dofinol for $6.70 per gallon. Alternatively, the anderine can be processed further at a cost of $8.70 per gallon (of anderine) into cermine. It takes 2 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $63.

Required:

2. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 530 gallons of anderine that undergo further processing require 17 more purchase orders at $11 each and 18 more quality inspection hours at $26 each. Which alternative would be better and by how much? Do NOT round interim calculations and, if required, round your answer to the nearest cent.

Solutions

Expert Solution

Computation of Profit at Split Off Point
Particular Anderine Dofinol
Sale value at split off point $67,200 $54,940
(5600*12) (8200*6.70)
Less:Allocation of Joint Cost ( in Ratio of 67200:54940) $40,439 $33,061
(73500*67200/(67200+54940) (73500*54940/(67200+54940)
Profit at split off point $26,761 $21,879
Computation profit , in case of Anderine Further Proceesed
Particular Amount
Gallon Cermine Produced (5600/2 Gallon) 2800
selling price per Ceramine gallon 63
Total sales revenue from Ceramine ( 2800*63) (a) $176,400
Less : Cost of Further Processsing
Cost of processing (5600*8.70) $48,720
Cost of Purchase orders (5600/530X 17X11) $1,976
(6000/500*20*$10)
Cost Quality inspection (5600/530*18*26) $4,945
(6000/500*15*$25)
Cost of processing anderine $40,439
Total Cost of Processing (b) $96,080
Profit after further processing (a-b) $80,320
Second Alternatie to sell after further processing of anderine is better

ekkarill92 answered 2 years ago
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